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Health insurers prepare to shift course, factor COVID costs into rates

Costs to test, treat and vaccinate members for COVID-19 drove sharp earnings declines last year forPriority Health andBlue Cross Blue Shield of Michigan, and both intend to work ongoing pandemic-related expenses into their rate requests for next year.

Grand Rapids-based Priority Health recorded $76.4 million in net income for 2021 across all health plans, a little more than half of the $143.2 million in net income for 2020.

Gates, Mozak

A large part of the 2021 bottom line came from the $43 million that Priority Health earned in investment income. The health plan also made $33.4 million in operating income through underwriting health policies for about 1 million members.

The 2021 results included $366 million that Priority Health spent during the year on COVID-19 testing, treating and administering vaccinations.

Health plans generally have eaten those costs the last two years. Neither Priority Health nor Blue Cross Blue Shield of Michigan — which account for most of the health insurance market in West Michigan — factored pandemic-related costs into rates for 2021 or 2022.

That will change when 2023 rate proposals are submitted this summer to state regulators and the pandemic is expected to transition into an endemic.

“Our 2021 financial results are a direct reflection of Priority Health’s commitment of putting our members first during the ongoing COVID-19 pandemic,” said Nick Gates, Priority Health’s senior vice president for finance.

“When we were pricing in 2021, the vaccine had rolled out and there was a lot of optimism around the vaccine as well as cases that were declining, so we did not factor in continued levels of the COVID pandemic that we’re seeing today,” Gates said. “Now, as we look at 2023 rates, we are trying to understand and predict what it’s going to look like in the endemic phase. We’re optimistic with case counts declining and we are going to move into an endemic, but we’re then trying to understand what are those routine costs and how much of that do we need to reflect in rates for 2023?”

The health plan’s pandemic-related costs over two years totaled $500 million. Of that amount, $75 million went for testing, $406 million for treatment, and $19 million for vaccine administration.

Gates said it’s too early to tell how including COVID costs will affect Priority Health’s 2023 rate proposals, which will also need to consider the financial effects from deferrals in procedures and surgeries in 2021 when COVID cases spiked.

“We are doing everything we can to lower the cost of care so that financial burden is minimized,” Gates said.

Health insurers prepare to shift course, factor COVID costs into rates

Rate shifts

For 2022, Priority Health implemented a 5-percent average rate increase statewide for small employers and trimmed individual policy rates by 0.3 percent. Blue Cross Blue Shield of Michigan increased rates an average of 7.9 percent in the small group market for 2022, and rates for HMO subsidiary Blue Care Network increased 6.9 percent.

Jerry Konal, senior director for health and benefits atWillis Towers Watson plc’s Detroit-area office, expects cost trends in 2022 “will be slightly higher as we begin to gather the appropriate data elements” for 2023 rates as this year progresses.

“Following the close of Q1, we will have a better handle on utilization and the state of the pandemic, so definitely more to come,” Konal wrote in an email to MiBiz.

Existing medical claims trends are a large factor in setting rates for the coming year.

In a filing to state health insurance regulators, Blue Cross Blue Shield reported $7.09 billion in hospital and medical claims in 2021, an 11.4-percent increase. Priority Health’s medical expenses increased 18 percent in 2021 to $5.1 billion.

Factoring COVID-related costs into 2023 rate proposals may lead to 2023 adjustments that are above recent trends, said Bob Hughes, principal atAdvantage Benefits Group Inc. in Grand Rapids.

“This has been paid for and now the bill is coming due,” said Hughes, noting that health plans were required under public mandates to cover the cost for COVID testing, treatment and vaccines administration. “These services were provided. They have to be paid for.”

COVID costs hit earnings

Overall, Priority Health generated $33.4 million in operating income in 2021 across all health plans, plus $43 million in investment income, with $5.82 billion in premium revenues. That compares to 2020 when Priority Health had $187.6 million in operating income with a $41.4 million investment loss and $5.18 billion in premium revenues.

Blue Cross Blue Shield of Michigan spent more than $860 million last year on COVID testing, treatment and vaccines, an amount that also was not figured into rates. The COVID-related costs contributed to Blue Cross Blue Shield recording a $374 million underwriting loss for 2021 in its core health insurance business.

Earnings on other non-health care businesses such as the Lansing-basedAF Group, and strong investment income of $907 million, helped the corporation overall record $360 million in net income with $32.49 billion in total premium revenues. That compares to $646 million in net income with $30.1 billion in total premium revenues in 2020.

The 2021 COVID-related costs included more than $600 million for treatment, $185 million for testing and $75 million to administer vaccines.

In the two years since the pandemic began, Blue Cross Blue Shield has paid $2.1 billion for COVID-related care that was not factored into present rates, said Executive Vice President and Chief Financial Officer Paul Mozak. That will begin to change next year for the insurer, which provides health coverage to more than 5.2 million people nationwide.

“Clearly last year, the ability to forecast what would happen in the rating cycle was going to be very, very challenging, and so we chose to do the appropriate right thing and not factor in those rates,” Mozak said. “Moving forward, we think it’s likely that COVID will become more endemic and we’ll take a very hard look to make sure how we factor endemic costs that will be occurring more routinely year to year into rates. But the decisions have not been finalized.”

Mozak declined to identify the amount that Blue Cross Blue Shield budgeted for COVID-related costs in 2022, saying those figures are confidential.

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